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Standard Costs 4/26/04

Chapter 10. Standard Costs 4/26/04. Predetermined. Used for planning labor, material and overhead requirements. Benchmarks for measuring performance. Used to simplify the accounting system. Standard Costs. Standard Costs are .

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Standard Costs 4/26/04

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  1. Chapter 10 Standard Costs 4/26/04

  2. Predetermined. Used for planning labor, materialand overhead requirements. Benchmarks formeasuring performance. Used to simplify the accounting system. Standard Costs Standard Costs are

  3. Managers focus on quantities and coststhat differ from standards by a significant amount, a practice known asmanagement by exception. Standard Costs Standard Amount DirectMaterial DirectLabor ManufacturingOverhead Type of Product Cost

  4. Setting Standard Costs Accountants, engineers, personnel administrators, and production managers combine efforts to set standards based on experience and expectations.

  5. Should we usepractical standardsor ideal standards? Setting Standard Costs Engineer ManagerialAccountant

  6. Practical standards should be set at levels that are currently attainable with reasonable and efficient effort. Setting Standard Costs Productionmanager

  7. Setting Standard Costs I agree.Ideal standards,based on perfection,are unattainable anddiscourage mostemployees. Human ResourcesManager

  8. Note • The argument that ideal standards are discouraging has been persuasive for many years. So “normal” defects and waste were built into the standards. • In recent years, TQM and other initiatives have sought to eliminate all defects and waste. • Ideal standards, that allow for no waste, have become more popular. • The emphasis is on improvement over time, not attaining the ideal standards right now.

  9. PriceStandards QuantityStandards Final, deliveredcost of materials,net of discounts. Material required per spec plus allowance for waste, etc. Setting Direct Material Standards (example p. 428)

  10. RateStandards TimeStandards Use wage surveys and labor contracts, include fringes. Time required to complete a unit of product, use time and motion study Setting Direct Labor Standards (example p. 429)

  11. RateStandards ActivityStandards The rate is the variable portion of the predetermined overhead rate. The activity is the base used to apply overhead to units of product Setting Variable Overhead Standards (example p. 430)

  12. Standard Cost Card – Variable Production Cost A standard cost card for one unit of product might look like this:

  13. A standard cost variance is the amount by whichan actual cost differs from the standard cost. This variance isunfavorablebecause the actual costexceeds the standard cost. Standard Cost Variances Standard Cost

  14. First, they point to causes ofproblems and directionsfor improvement. Second, they trigger investigations in departments having responsibility for incurring the costs. Mr.D: “I see that there is an unfavorable variance. But why are variances important to me?” Standard Cost Variances

  15. Price Variance Quantity Variance The difference betweenthe actual price and thestandard price The difference betweenthe actual quantity andthe standard quantity Standard Cost Variances Standard Cost Variances

  16. Price Variance Quantity Variance Standard price is the amount that should have been paid for the resources acquired. A General Model for Variance Analysis (Exhibit 10-3) Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

  17. Standard quantity is the quantity allowed for the actual good produced. A General Model for Variance Analysis Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price Variance Quantity Variance

  18. A General Model for Variance Analysis Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price Variance Quantity Variance AQ(AP - SP) SP(AQ - SQ) AQ = Actual QuantitySP= Standard PriceAP= Actual PriceSQ = Standard Quantity

  19. Favorable/Unfavorable Variances • If AQ(AP-SP) = positive = unfavorable (actual is greater than standard) • If AQ(AP-SP) = negative = favorable (actual is less than standard) • If SP(AQ-SQ) = positive = unfavorable • If SP(AQ-SQ) = negative = favorable

  20. Standard Costs Let’s use the general model to calculate all standard cost variances, starting withdirect material.

  21. Zippy Material VariancesExample Hanson Inc. has the following direct material standard to manufacture one Zippy: 1.5 pounds per Zippy at $4.00 per pound Last week 1,700 pounds of material were purchased and used to make 1,000 Zippies. The material cost a total of $6,630.

  22. Zippy Quick Check  What is the actual price per poundpaid for the material? a. $4.00 per pound. b. $4.10 per pound. c. $3.90 per pound. d. $6.63 per pound.

  23. Zippy AP = $6,630 ÷ 1,700 lbs.AP = $3.90 per lb. Quick Check  What is the actual price per poundpaid for the material? a. $4.00 per pound. b. $4.10 per pound. c. $3.90 per pound. d. $6.63 per pound.

  24. Zippy Quick Check  Hanson’s material price variance (MPV)for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable.

  25. Zippy MPV = AQ(AP - SP) MPV = 1,700 lbs. × ($3.90 - 4.00) MPV = $170 Favorable Quick Check  Hanson’s material price variance (MPV)for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable.

  26. Zippy Quick Check  The standard quantity of material thatshould have been used to produce1,000 Zippies is: a. 1,700 pounds. b. 1,500 pounds. c. 2,550 pounds. d. 2,000 pounds.

  27. Zippy SQ = 1,000 units × 1.5 lbs per unit SQ = 1,500 lbs Quick Check  The standard quantity of material thatshould have been used to produce1,000 Zippies is: a. 1,700 pounds. b. 1,500 pounds. c. 2,550 pounds. d. 2,000 pounds.

  28. Zippy Quick Check  Hanson’s material quantity variance (MQV)for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable.

  29. Zippy Price variance$170 favorable Quantity variance$800 unfavorable Material VariancesSummary Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price 1,700 lbs. 1,700 lbs. 1,500 lbs. × × × $3.90 per lb. $4.00 per lb. $4.00 per lb. =$6,630 = $ 6,800 = $6,000

  30. The price variance is computed on the entire quantitypurchased. • The quantity variance is computed only on the quantityused. Material Variances Hanson purchased and used 1,700 pounds. How are the variances computed if the amount purchaseddiffers from the amount used?

  31. Zippy Material VariancesContinued Hanson Inc. has the following material standard to manufacture one Zippy: 1.5 pounds per Zippy at $4.00 per pound Last week 2,800 pounds of material were purchased at a total cost of $10,920, and 1,700 pounds were used to make 1,000 Zippies.

  32. Zippy Price variance increases because quantity purchased increases. Price variance$280 favorable Material VariancesContinued Actual Quantity Actual Quantity Purchased Purchased × × Actual Price Standard Price 2,800 lbs. 2,800 lbs. × × $3.90 per lb. $4.00 per lb. = $10,920 = $11,200

  33. Zippy Quantity variance is unchanged because actual and standard quantities are unchanged. Quantity variance$800 unfavorable Material VariancesContinued Actual Quantity Used Standard Quantity × × Standard Price Standard Price 1,700 lbs. 1,500 lbs. × × $4.00 per lb. $4.00 per lb. = $6,800 = $6,000

  34. You used too much material because of poorly trained workers and poorly maintained equipment. Also, your poor scheduling sometimes requires me to rush order material at a higher price, causing unfavorable price variances. I am not responsible for this unfavorable materialquantity variance. You purchased cheapmaterial, so my peoplehad to use more of it. Responsibility for Material Variances

  35. Material Price Variance Causes • Odd lot sizes • Price discounts • Rush orders • Lower quality materials • Special pricing • Transportation method

  36. Material Quantity Variance Causes • Faulty/poorly maintained machinery • Poor quality material • Untrained workers • New workers • Poor supervision

  37. Standard Costs – Direct Labor Now let’s calculate standard cost variances fordirect labor.

  38. Note • Materials variances: • Material price variance • MPV = AQ (AP - SP) • Material quantity variance • MQV = SP (AQ - SQ) • Labor variances: • Labor rate variance • LRV = AH (AR - SR) • Labor efficiency variance • LEV = SR (AH - SH) Actual hours Actual rate Standard rate Standard hours allowed for the actual good output

  39. Zippy Labor Variances Example Hanson Inc. has the following direct labor standard to manufacture one Zippy: 1.5 standard hours per Zippy at $12.00 perdirect labor hour Last week 1,550 direct labor hours were worked at a total labor cost of $18,910to make 1,000 Zippies.

  40. Zippy Quick Check  What was Hanson’s actual rate (AR)for labor for the week? a. $12.20 per hour. b. $12.00 per hour. c. $11.80 per hour. d. $11.60 per hour.

  41. Zippy AR = $18,910 ÷ 1,550 hours AR = $12.20 per hour Quick Check  What was Hanson’s actual rate (AR)for labor for the week? a. $12.20 per hour. b. $12.00 per hour. c. $11.80 per hour. d. $11.60 per hour.

  42. Zippy Quick Check  Hanson’s labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable.

  43. Zippy LRV = AH(AR - SR) LRV = 1,550 hrs($12.20 - $12.00) LRV = $310 unfavorable Quick Check  Hanson’s labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable.

  44. Zippy Quick Check  The standard hours (SH) of labor thatshould have been worked to produce1,000 Zippies is: a. 1,550 hours. b. 1,500 hours. c. 1,700 hours. d. 1,800 hours.

  45. Zippy SH = 1,000 units × 1.5 hours per unit SH = 1,500 hours Quick Check  The standard hours (SH) of labor thatshould have been worked to produce1,000 Zippies is: a. 1,550 hours. b. 1,500 hours. c. 1,700 hours. d. 1,800 hours.

  46. Zippy Quick Check  Hanson’s labor efficiency variance (LEV)for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable.

  47. Zippy Quick Check  Hanson’s labor efficiency variance (LEV)for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable. LEV = SR(AH - SH) LEV = $12.00(1,550 hrs - 1,500 hrs) LEV = $600 unfavorable

  48. Zippy Rate variance$310 unfavorable Efficiency variance$600 unfavorable Labor VariancesSummary Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate 1,550 hours 1,550 hours 1,500 hours × × × $12.20 per hour $12.00 per hour $12.00 per hour = $18,910 = $18,600 = $18,000

  49. Using highly paid skilled workers toperform unskilled tasks results in anunfavorable rate variance. Overtime Premium Wage increase Labor Rate Variance – A Closer Look Turnover of Employees Production managers who make work assignmentsare generally responsible for rate variances.

  50. Insufficient demand for product Poorlytrainedworkers Poorqualitymaterials Poorsupervisionof workers Poorlymaintainedequipment Labor Efficiency Variance –A Closer Look UnfavorableEfficiencyVariance

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